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SCHEDULE 14C INFORMATION
Information Statement Pursuant to Section 14(c) of
the Securities Exchange Act of 1934 (Amendment No. )
Check the appropriate box:
/X/ Preliminary Information Statement
/X/ Confidential, for Use of the Commission Only (as permitted by Rule
14c-5(d)(2))
/ / Definitive Information Statement
U.S. MEDICAL PRODUCTS, INC.
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(Name of Registrant As Specified In Its Charter)
Payment of Filing Fee (Check the appropriate box):
/X/ No fee required
/ / Fee computed on table below per Exchange Act Rules 14c-5(g) and 0-11
(1) Title of each class of securities to which transaction applies:
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(2) Aggregate number of securities to which transaction applies:
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(3) Per unit price or other underlying value of transaction computed
pursuant to Exchange Act Rule 0-11 (set forth the amount on which the
filing fee is calculated and state how it was determined):
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(4) Proposed maximum aggregate value of transaction:
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(5) Total fee paid:
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/ / Fee paid previously with preliminary materials.
/ / Check box if any part of the fee is offset as provided by Exchange Act Rule
0-11(a)(2) and identify the filing for which the offsetting fee was paid
previously. Identify the previous filing by registration statement number,
or the Form or Schedule and the date of its filing.
(1) Amount Previously Paid:
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(4) Date Filed:
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U.S. MEDICAL, INC.
12201 TECHNOLOGY BOULEVARD, SUITE 100
AUSTIN, TEXAS 78727-6208
(512) 257-8787
INFORMATION STATEMENT
INTRODUCTION
This Information Statement is being furnished to holders of shares of
common stock, no par value (the "Common Stock"), of U.S. Medical Products,
Inc., a Texas corporation (the "Company"), in connection with the written
consent of Metrax Medical, Inc., a Delaware corporation ("MMI"), the holder
of approximately 80% of the Company's outstanding Common Stock, to the sale
to Hayes Medical, Inc., a California corporation ("Hayes Medical"), of
substantially all of the Company's assets pursuant to (i) a License Agreement
(the "License Agreement") and (ii) an Asset Purchase Agreement (the "Asset
Purchase Agreement"), both of which are, dated as of May 20, 1997, by and
between the Company and Hayes Medical (the proposed sale pursuant to the
License Agreement and the Asset Purchase Agreement is hereafter referred to
as the "Proposed Sale"). The consideration paid by Hayes Medical under the
License Agreement was $400,000 in cash and a promissory note in the amount of
$150,000. The consideration to be paid by Hayes Medical under the Asset
Purchase Agreement is equal to (i) $300,000 in cash (subject to adjustment);
(ii) a promissory note, which shall be in the principal amount of 56.25% of
the agreed upon historical cost of the assets less the certain liabilities to
be assumed by Hayes Medical, less the $300,000 cash payment. The promissory
notes will be due in eighteen equal monthly installments including accrued
interest. The notes will bear interest at ten percent (10%) per annum and
will be secured by inventory of Hayes Medical.
The final purchase price will be determined based on a final closing
statement, which the Company shall deliver to Hayes Medical within 30 days after
the Closing Date. The Company delivered to Hayes Medical a draft closing
statement, attached as Annex A to this Information Statement and is incorporated
herein by reference. See "The Asset Purchase Agreement--Purchase Price."
Copies of the License Agreement and the Asset Purchase Agreement are attached
hereto as Annex B and C, respectively.
This Information Statement is first being mailed to stockholders on or
about June __,1997, and it is accompanied by (i) a copy of the Company's latest
Form 10-KSB for the year ended Decmeber 31, 1996, as amended, and (ii) a copy of
the Company's latest Form 10-QSB for the quarter ended March 31, 1997.
This Information Statement is furnished for information purposes only. THE
COMPANY IS NOT ASKING YOU FOR A PROXY AND YOU ARE REQUESTED NOT TO SEND US A
PROXY.
THE PROPOSED SALE IS CONDITIONED UPON, AMONG OTHER THINGS, THE SECURING OF
ALL NECESSARY APPROVALS AND CONSENTS. THERE CAN BE NO ASSURANCE THAT THE
CONDITIONS TO THE PROPOSED SALE WILL BE SATISFIED OR WAIVED AND THAT THE
PROPOSED SALE WILL BE CONSUMMATED. SEE "THE ASSET PURCHASE AGREEMENT--
CONDITIONS."
Since the Proposed Sale involves a sale of assets, the stockholders of the
Company will retain their equity interest in the Company following its
consummation, which will have received the proceeds from the Proposed Sale. See
"The Proposed Sale--Use of Proceeds; Conduct of Business Following the Proposed
Sale."
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THE INFORMATION CONTAINED HEREIN UNDER "SUMMARY--THE COMPANIES--HAYES
MEDICAL, INC." AND "CERTAIN INFORMATION CONCERNING HAYES MEDICAL" HAS BEEN
SUPPLIED BY HAYES MEDICAL. NO PERSONS HAVE BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATION OTHER THAN THOSE CONTAINED IN THIS
INFORMATION STATEMENT AND, IF GIVEN OR MADE, SUCH INFORMATION OR
REPRESENTATION MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE
COMPANY OR ANY OTHER PERSON.
AVAILABLE INFORMATION
The Company is subject to the informational requirements of the
Securities Exchange Act of 1934, as amended (the "Exchange Act"), and in
accordance therewith files reports, proxy statements and other information
with the Securities and Exchange Commission (the "Commission"). The reports,
proxy statements and other information filed by the Company with the
Commission can be inspected and copied at the public reference facilities
maintained by the Commission at Room 1024, 450 Fifth Street, N.W.,
Washington, D.C. 20549, and at the Commission's Regional Offices at 7 World
Trade Center, 13th Floor, New York, New York 10048 and Northwestern Atrium
Center, 500 West Madison Street, Suite 1400, Chicago, Illinois 60661-2511.
Copies of such material also can be obtained from the Public Reference
Section of the Commission, Washington, D.C. 20549 at prescribed rates. Until
June 16, 1997, the Common Stock and warrants to purchase Common Stock were
traded on the Boston Stock Exchange. Reports and other information
concerning the Company may be inspected at the National Association of
Securities Dealers, Inc., 1735 K Street, N.W., Washington, D.C. 20006. The
Commission maintains a World Wide Web site that contains reports, proxy and
information statements and other information regarding registrants that file
electronically with the Commission. The address of the Commission's web site
is http://www.sec.gov.
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TABLE OF CONTENTS
INTRODUCTION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . i
AVAILABLE INFORMATION. . . . . . . . . . . . . . . . . . . . . . . . . . . ii
SUMMARY. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
The Companies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
The Stockholder Consent . . . . . . . . . . . . . . . . . . . . . . . . 1
The Proposed Sale . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
THE STOCKHOLDER CONSENT. . . . . . . . . . . . . . . . . . . . . . . . . . 4
THE PROPOSED SALE. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
Background of the Proposed Sale . . . . . . . . . . . . . . . . . . . . 4
Opinion of the Advisor. . . . . . . . . . . . . . . . . . . . . . . . . 5
Approval of the Board of Directors; Reasons for the Proposed Sale . . . 8
Certain Tax Consequences. . . . . . . . . . . . . . . . . . . . . . . . 9
Use of Proceeds; Conduct of Business Following the Proposed Sale. . . . 9
Interests of Certain Persons in the Proposed Sale . . . . . . . . . . . 9
Accounting Treatment. . . . . . . . . . . . . . . . . . . . . . . . . . 9
Dissenters' Appraisal Rights. . . . . . . . . . . . . . . . . . . . . . 9
THE LICENSE AGREEMENT. . . . . . . . . . . . . . . . . . . . . . . . . . . 10
THE ASSET PURCHASE AGREEMENT . . . . . . . . . . . . . . . . . . . . . . . 11
Assets to be Sold and Liabilities to be Assumed . . . . . . . . . . . . 11
Purchase Price. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12
Representations and Warranties and Certain Covenants. . . . . . . . . . 12
Employment and Employee Benefit Plans . . . . . . . . . . . . . . . . . 13
Conditions. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13
Termination . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13
Indemnification . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
CERTAIN INFORMATION CONCERNING THE HAYES MEDICAL . . . . . . . . . . . . . 14
PRO FORMA FINANCIAL INFORMATION. . . . . . . . . . . . . . . . . . . . . . 15
RECENT DEVELOPMENTS. . . . . . . . . . . . . . . . . . . . . . . . . . . . 15
SECURITY OWNERSHIP OF CERTAIN
BENEFICIAL OWNERS AND MANAGEMENT. . . . . . . . . . . . . . . . . . . . 16
MARKET PRICE DATA. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17
Annexes
A. Draft Closing Statement. . . . . . . . . . . . . . . . . . . . . . A-1
B. License Agreement. . . . . . . . . . . . . . . . . . . . . . . . . B-1
C. Asset Purchase Agreement . . . . . . . . . . . . . . . . . . . . . C-1
D. Opinion of the Advisor . . . . . . . . . . . . . . . . . . . . . . D-1
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SUMMARY
The following is a summary of certain information contained elsewhere in
this Information Statement. Reference is made to, and this summary is qualified
in its entirety by, the more detailed information contained in this Information
Statement and the Annexes hereto. Unless otherwise defined herein, capitalized
terms used in this summary have the respective meanings ascribed to them
elsewhere in this Information Statement. Stockholders are urged to read this
Information Statement and the Annexes hereto in their entirety.
THE COMPANIES
U.S. Medical Products, Inc. The Company was formed in 1991 to develop, market
and distribute hip and knee prostheses, together
with corresponding surgical instruments utilized
to implant such devices. Its products are joint
reconstructive devices, namely the Consensus -
Knee, Hip and Bipolar Systems, consisting of
prosthesis that replace all or a part of the
patient's own diseased or fractured joint,
together with the specialized surgical instruments
used to implant these devices. The Company
marketed these products in the United States,
Italy, Germany, Switzerland, Austria and Turkey.
Hayes Medical, Inc. Hayes Medical was formed to capitalize on emerging
business opportunities in the medical device
industry. Its mission is to become an industry
leader in the creation, evolution, and production
of world class medical products and technologies
for the orthopedic implant and device market. It
will sell its products to the medical profession
throughout the United States and other countries.
Hayes Medical is in the development stage and has
yet to generate any significant product revenue,
but has recently begun to sell its products to
outside customers.
THE STOCKHOLDER CONSENT
Consent Required Article 5.10 of the Texas Business Corporation Act
permits a Texas corporation to sell all, or
substantially all, of its assets if the sale is
approved by the affirmative vote of the holders of
at least two-thirds of the outstanding shares of
the corporation entitled to vote thereon. Article
fifteen of the Corporation's Articles of
Incorporation further allows such sale upon the
approval of a majority of the shares entitled to
vote for such a sale. MMI owns approximately 80%
of the outstanding Common Stock. In order to
satisfy a condition to the closing of the Asset
Purchase Agreement, MMI intends to consent in
writing to the adoption of the License Agreement
and the Asset Purchase Agreement pursuant to
Section 9.10 of the Texas Business Corporation
Act. Accordingly, no vote of any other stockholder
is necessary and stockholder votes are not being
solicited. See "The Stockholder Consent."
THE PROPOSED SALE
Assets to Be Sold The Company has agreed to sell to Hayes Medical
substantially all of the Company's assets and its
intellectual property, which constitute the
Company's business relating to its orthopedic
product lines (the "Product Lines"). The assets to
be sold or transferred by the Company to Hayes
Medical pursuant to the Asset Purchase Agreement
(the "Assets") include certain trade and other
notes and accounts receivable of the Company,
inventory, all intangible assets used in the
Company's operation or maintenance of the Company,
including, goodwill, and other assets of the
Company. Pursuant to the Asset Purchase
Agreement, Hayes Medical will assume and
thereafter be responsible for paying
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and satisfying certain of the Company's
liabilities (the "Assumed Liabilities"). Pursuant
to the License Agreement, Hayes will acquire the
Company's intellectual property relating to the
Product Lines.
Purchase Price The consideration paid by Hayes Medical under the
License Agreement was $400,00 and a promissory
note, secured by the inventory of Hayes Medical,
in the amount of $150,000 at 10% interest per
annum payable over eighteen months.
The Asset Purchase Agreement provides for an
aggregate consideration, to be delivered to the
Company at the Closing, equal to: (i) $300,000 in
cash (subject to adjustment); (ii) a secured
promissory note, which shall be in the principal
amount of 56.25% of the agreed upon historical
cost of the Assets less the Assumed Liabilities at
the Closing, less the $300,000 cash payment and
less any reduction pursuant to Hayes Medical's
right of offset. The Note will be due in eighteen
equal monthly installments including accrued
interest with the first such monthly installment
being due the first day of the first month
beginning after the Closing Date and subsequent
installments being due the first day of each month
thereafter. The Note will bear interest at ten
percent (10%) per annum and will be secured by the
inventory of Hayes Medical.
The final purchase price will be determined based
on the Final Closing Statement, which the Company
shall deliver to Hayes Medical within 30 days
after the Closing Date.
Closing of the Proposed Sale The Closing will take place on that date and time
as the Company and Hayes Medical mutually agree
that all conditions precedent to the obligations
of the parties under the Asset Purchase Agreement
have been met. See "The Asset Purchase
Agreement--Conditions."
Approval by the Board The Board of Directors believes that the Proposed
Sale is expedient and for the best interests of the
Company, and has approved the Proposed Sale. The
Board of Directors' approval of the Proposed Sale
is based upon a number of factors described in this
Information Statement. See "The Proposed Sale
Approval by the Board of Directors; Reasons for the
Proposed Sale" and "The Proposed Sale--Interests
of Certain Persons in the Proposed Sale."
Opinion of The Advisor The William Jamieson Group, Inc., a Financial
Advisory Firm ("the Advisor"), was engaged to
render an opinion as to the fairness from a
financial point of view of the consideration to be
received by the Company pursuant to the Asset
Purchase Agreement and the License Agreement.
The Advisor has delivered to the Board of
Directors its opinion to the effect that, as of
the date of its opinion and subject to the
assumptions made, matters considered and limits of
the review undertaken, as set forth in such
opinion, the consideration to be received by the
Company pursuant to the Proposed Sale is fair from
a financial point of view to the Company.
A copy of the opinion of the Advisor is attached
to this Information Statement as Annex D. The
attached opinion sets forth the assumptions made,
matters considered, the scope and limitations of
the review undertaken and procedures followed by
the Advisor and should be read in its entirety.
See "The Proposed Sale--Opinion of Advisor."
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Use of Proceeds; Conduct All of the proceeds from the Proposed Sale will be
of Business Following the used to repay outstanding indebtedness of the
Proposed Sale Company, including indebtedness owed to MMI and to
an affiliate of MMI.
Following consummation of the Proposed Sale, the
Company will finalize its merger negotiations with
MMI. Upon consummation of a merger between the
Company and MMI, the Company anticipates that it
will remain as the surviving entity, change its
name to Metrax International, Inc. and continue
the operations of MMI as a holding Company for
Metrax GmbH. See "The Proposed Sale--Use of
Proceeds; Conduct of Business Following the
Proposed Sale."
Certain Tax Consequences The Proposed Sale will be a taxable transaction to
Federal Income Tax Purposes the Company for United States Federal income tax
purposes. The Company recorded at December 31,
1996 a net deferred tax liability of $432,264 in
anticipation of the estimated tax liability
resulting from the Proposed Sale.
Conditions to the Proposed The obligations of the Company and Hayes Medical
to consummate the Proposed Sale are subject
to the satisfaction or waiver of certain
conditions customary to a transaction of this
nature, including, among others, the occurrence of
certain events described in "The Asset Purchase
Agreement-Condition."
Termination The Asset Purchase Agreement may be terminated and
abandoned at any time prior to the Closing Date by
the written agreement of the Company and Hayes
Medical. See "The Asset Purchase
Agreement--Termination."
Interests of Certain Persons For information relating to the interests of
in the Proposed Sale certain persons in the Proposed Sale, see "The
Proposed Sale--Interests of Certain Persons in the
Proposed Sale."
Dissenters' Appraisal Rights Texas provides dissenters' rights for disposition
of all or substantially all of a Texas
corporation's assets. The Company will within ten
(10) days after the date the Proposed Sale is
effected, mail to each shareholder of record as of
the effective date of the Proposed Sale, notice of
the fact and date of the Proposed Sale and that
the shareholder may exercise the shareholder's
right to dissent from the Proposed Sale.
Shareholders may then make written demand, within
twenty (20) days after the mailing of the notice,
for payment of the fair value of the shareholder's
shares. Failure to make demand within the twenty
day period will result in the shareholder being
bound by the sale.
The Company must accept, or reject by making a
counteroffer as to the estimated fair value of the
shares, the dissenting shareholder's demand for
payment. Should the dissenting shareholder reject
the counteroffer, then within 120 days after the
date on which the Proposed Sale was effective, the
shareholder or the Company may file a petition in
any court of competent jurisdiction in the county
in which the principal office of the domestic
corporation is located, asking for a finding and
determination of the fair value of the
shareholder's share. See "The Proposed Sale
-Dissenters' Appraisal Rights."
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THE STOCKHOLDER CONSENT
Article 5.10 of the Texas Business Corporation Act permits a Texas
corporation to sell all, or substantially all, of its assets if the sale is
approved by the affirmative vote of the holders of at least two-thirds of the
outstanding shares of the corporation entitled to vote thereon. Article fifteen
of the Corporation's Articles of Incorporation further allows such sale upon the
approval of a majority of the shares entitled to vote for such a sale.
MMI owns approximately 80% of the outstanding Common Stock. In order to
satisfy a condition to the closing of the Asset Purchase Agreement, MMI intends
to consent in writing to the adoption of the License Agreement and the Asset
Purchase Agreement pursuant to Section 9.10 of the Texas Business Corporation
Act. Accordingly, no vote of any other stockholder is necessary and stockholder
votes are not being solicited.
Subject to the terms and conditions of the Asset Purchase Agreement, it is
contemplated that the Proposed Sale will be consummated not earlier than 20 days
after the mailing of this Information Statement and following satisfaction or
waiver of the conditions contained in the Asset Purchase Agreement. See "The
Asset Purchase Agreement--Conditions." This Information Statement is first
being mailed to stockholders on _________ , 1997.
THE PROPOSED SALE
Background Of The Proposed Sale
U.S. Medical Products, Inc. (the "Company") was incorporated in Texas on
March 25, 1991. The Company was formed to develop, market and distribute hip
and knee prostheses, together with corresponding surgical instruments utilized
to implant such devices. The Company marketed these products in the United
States, Italy, Germany, Switzerland, Austria and Turkey.
Since as early as 1995, the Company has encountered a number of unexpected
delays in obtaining FDA approvals and in bringing its products to market. These
delays severely restricted the Company's ability to generate adequate cash flow
from operations, and the Company's cash requirements since have significantly
exceeded its capital resources and cash generated from operations.
Specifically, the Company experienced cash flow deficiencies from operations as
a result of significant expenditures, including expenditures related to research
and development, product introduction, obtaining FDA approvals or clearances to
market products, obtaining and maintaining manufacturing and distribution
arrangements, and maintaining inspection and clean room facilities.
During 1994 and 1995, the Company experienced cash flow deficiencies and
incurred operating losses that resulted in an accumulated deficit of $9,341,842
at December 31, 1995. During this period, the Company funded its operations
primarily through the sale of equity securities and the issuance of promissory
notes to its majority shareholder at that time, Smith Management Co., Inc. and
related entities ("Smith Management"). During 1995, Smith Management provided
$5,537,410 in debt financing at 10% interest to the Company and purchased
1,257,532 shares of Common Stock and 1,474,250 Class A Redeemable Common Stock
Purchase Warrants for $250,000 in cash. Additionally, during 1995, Smith
Management converted $899,551 of debt due from the Company into 2,432,534 shares
of Common Stock and 5,304,653 Class A Warrants. At December 31, 1995, the
aggregate face amount of convertible debt and promissory notes due to Smith
Management was $4,988,898 of which the principal amount of $4,637,859 was
outstanding.
Subsequent to December 31, 1995, the Company issued demand notes in favor
of Smith Management in the amounts of $293,022 and $5,000,000. The note in the
amount of $293,022 was utilized to capitalize interest then due and owing to
Smith Management. A portion of the proceeds of the $5,000,000 note was used to
discharge the principal balances of other promissory notes to Smith Management
then outstanding. In February 1996, Smith Management transferred its promissory
notes then outstanding and its equity in the Company to Durian Securities, Inc.
("Durian"), a private investment company managed and administered by Smith
Management. On that same date, Durian increased its equity position in the
Company from 53% to 80% through the conversion of $1,849,449 of convertible debt
into 9,307,994 shares of Common Stock and 10,492,046 Class A Warrants. At March
1996, the
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face amount of the promissory notes issued by the Company in favor of Durian was
$5,293,021 of which the principal amount of $4,289,021 was outstanding.
The Company's current majority shareholder, MMI, acquired control of the
Company on August 19, 1996, by acquiring from Durian 12,998,060 shares of
Common Stock of the Company and 17,270,948 Class A Warrants and a note issued
by the Company to Durian, dated as of August 19, 1996 in the principal amount
of $1,100,000 (the "Company Note") for a consideration of $25,000 in cash and
a promissory note in the principal amount of $975,000, bearing interest at
the rate of ten percent (10%) per annum (the "MMI Note"). Principal and
interest under the MMI Note were due and payable in three installments in
August 1996 and November 1996 and January 1997, respectively. The MMI Note
was secured by the Company Note and all collateral securing the Company's
obligations under the note. MMI's obligations under the note were also
guaranteed by Metrax GmbH, a German based medical products company ("Metrax
GmbH"), and the principal shareholder of Metrax GmbH. Metrax GmbH is a
wholly owned subsidiary of MMI. Durian also in August 1996 contributed
$4,980,731 of debt payable from the Company to capital. Although MMI
concluded that the Company was insolvent, MMI's purpose in purchasing the
Company's Common Stock and the Company Note was to effect a business
combination between the Company and MMI. Metrax GmbH is in the business of
developing, manufacturing and distributing internationally professional
medical products and consumer wellness products.
Following MMI's purchase of the Common Stock, the directors and
management of the Company resigned and were replaced by the Company's current
Board of Directors and management. During the fourth quarter of 1996, the
current Board of Directors and management began an evaluation of the
Company's strategic alternatives in light of the Company's financial
condition, insolvency, market conditions and other considerations. During
this period, management was unsuccessful in its efforts to secure additional
working capital. In view of the inability to secure such financing, it was
determined that a reduction in the Company's outstanding indebtedness was
necessary to address current liquidity demands to continue as a going concern
and to avoid an involuntary sale of its assets.
In order to obtain liquidity, on January 15, 1997, The Company accepted a
purchase order by a wholly-owned subsidiary of Hayes Medical (the
"Distributor") to purchase inventory with a book value of $1.78 million
dollars in exchange for a cash purchase price of 56.25% of the net book value
of such inventory ($1.0 million) and accepted an offer by the Distributor to
act as the Company's exclusive domestic distributor. In order to avoid an
involuntary sale of the Company's assets by its creditors, including Durian,
the Company used the proceeds from the sales to the Distributor to pay to MMI
$1,000,000 in partial satisfaction of the Company Note. MMI then used a
majority of these proceeds to satisfy its obligation to Durian under the MMI
Note and at the same time loaned $165,000 to the Company. On February 1,
1997, the Company granted to the Distributor world wide distribution rights
and accepted a purchase price of 56.25% of the inventory's book value
($.3 million dollars). On February 1 the Company also entered into a letter of
intent with Hayes Medical to sell certain tangible and intangible assets
related to the Company's orthopedic product lines (the "Product Lines"). On
April 7, 1997, the Company signed an amendment to the distribution agreement
whereby up to an additional $700,000 of inventory could be purchased at a
price of 30% above cost (prior to valuation reserves) for new inventory or
56.25% of historical cost (prior to valuation reserves) for existing
inventory. Additional future purchases made under this agreement, if any,
will be made at a price to be agreed upon by both parties.
During its negotiations with Hayes Medical, the Company consulted its
independent Advisor on various issues concerning the Proposed Sale, including
the purchase price and other issues relating to the fairness of the terms of
the Proposed Sale. On May 20, 1997 the Board, considering the factors
referred to below under "Approval of the Board of Directors; Reasons for the
Proposed Sale," determined that the Proposed Sale was expedient and for the
best interests of the Company and voted to approve the Asset Purchase
Agreement and the License Agreement, subject to satisfaction of the
conditions of closing of the Asset Purchase Agreement.
Opinion Of The Independent Advisor
On February 11, 1997, the Company retained the Advisor to render a fairness
opinion in connection with the Proposed Sale. The Company selected the Advisor
based upon the Advisor's qualifications, expertise and
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reputation as a valuation advisor, as well as the Advisor's prior familiarity
with the Company. The Advisor delivered its opinion to the Company to the
effect that based upon the assumptions made, matters considered and limits of
the review undertaken, as set forth in such opinion, the Proposed Sale is fair
to the Company's shareholders and the Company from a financial point of view.
The full text of the Advisor's written opinion dated the date of this
Information Statement is attached hereto as Annex D to this Information
Statement and is incorporated herein by reference. Stockholders of the Company
are urged to, and should, read the opinion carefully and in its entirety for the
assumptions made, matters considered and limits of the review undertaken by the
Advisor. Although the Company believes that the summary below describes the
material portions thereof, such summary of the opinion of the Advisor set forth
herein is qualified in its entirety by reference to the full text of such
opinion.
In arriving at its opinion, the Advisor reviewed the Asset Purchase
Agreement, the Distribution Agreement and the License Agreement and certain
publicly available business and financial information relating to the Company
and Hayes Medical. The Advisor also reviewed certain other information
furnished to the Advisor by the Company and discussed the business and
prospects of the Company with the Company's management. In addition, the
Advisor also considered certain financial data of the Company and compared
that data with stock market data for publicly held companies in businesses
similar to those of the Company. The Advisor also considered such other
information, financial studies, analyses and investigations and financial,
economic and market criteria which it deemed relevant.
In connection with its review, the Advisor did not assume any
responsibility for independent verification of any of the foregoing information
and relied on its being complete and accurate in all material aspects. In
addition, the Advisor did not make an independent evaluation or appraisal of the
assets or liabilities (contingent or otherwise) of the Company, nor was it
furnished with any such evaluations or appraisals. The Advisor's opinion was
necessarily based upon financial, economic, market or other conditions as they
existed and could be evaluated on the date of the opinion. In connection with
its engagement, the Advisor was not requested to, and did not, solicit third
party indications of interest in acquiring the business of the Company. In
addition, although the Advisor evaluated the fairness of the consideration to be
received by the Company from a financial point of view, the Advisor was not
asked to and did not recommend the form or amount of consideration payable in
the Proposed Sale.
In arriving at its opinion and making its presentation to the Board of
Directors, the Advisor performed a variety of financial analyses, including
those summarized below. The summary set forth below includes certain of the
financial analyses discussed by the Advisor with the Board of Directors, but
does not purport to be a complete description of the analyses performed by the
Advisor in arriving at its opinion. Arriving at a fairness opinion is a complex
process that involves various determinations as to the most appropriate and
relevant methods of financial analysis and the application of those methods to
the particular circumstances and, therefore, such an opinion is not necessarily
susceptible to partial analysis or summary description. The Advisor believes
that its analyses must be considered as a whole and that selecting portions of
its analyses or portions of the factors considered by it, without considering
all analyses and factors, could create an incomplete view of the evaluation
process underlying its opinion.
In performing its analyses, the Advisor made numerous assumptions with
respect to industry performance, general business, economic, market and
financial conditions and other matters, many of which are beyond the control of
the Company. Any estimates incorporated in the analyses performed by the
Advisor are not necessarily indicative of actual values or future results, which
may be significantly more or less favorable than suggested by such analyses.
Additionally, estimates of the value of businesses and securities neither
purport to be appraisals nor necessarily reflect the prices at which businesses
or securities may actually be sold. Accordingly, such analyses and estimates
are inherently subject to substantial uncertainty. An analysis of publicly
traded comparable companies is not mathematical; rather it involves complex
considerations and judgments concerning differences in financial and operating
characteristics of the comparable companies or the companies involved in
comparable acquisition transactions and other factors that could affect the
public trading value of the comparable companies or company or transaction to
which they are being compared.
6
<PAGE>
The following is a summary of the Advisor's opinion. In connection with
preparing its opinion the Advisor reviewed a number of documents, including:
the letter of intent for sale of assets to Hayes Medical and the draft Asset
Purchase Agreement; the Worldwide Exclusive Distributor Agreement dated
February 1, 1997, including executed purchase orders; physical inventory detail
dated March 31, 1997; draft audited financial statements for the Company for
December 31, 1996 and the net assets in liquidation of the Company; audited
financial statements for the Company for 1995 and 1994; interim financial
statements for March 31,1997; actual and plan interim financial statement for
the period ending December 31, 1996; the Company's 5 year pro forma income
statement dated November, 1996; 1996 Marketing Plan and quarterly pro forma
income statement; detailed list of account receivables with aging information,
and list of all account payables and creditors; Form 10-KSB for December 31,
1996, 1995 and 1994; Form 8-K dated August 21, 1996 and February 22, 1996;
Purchase Agreement dated August 19, 1996 between MMI and Durian; the
Contribution Agreement dated August 21, 1996, between the Company and Durian for
the contribution to the Company's capital of certain outstanding note debt and
note interest; the Company's shareholder list as of February 5, 1997; detail on
various stock option plans and warrants issued to purchase the common stock of
the Company; various documents, memoranda prepared by the Company management,
including but not limited to (i) a summary of the Company's operations and
history, (ii) background information on key management personnel, (iii) the
Company's organizational structure, (iv) intellectual property assets schedule
dated February 24, 1997, (v) summary of the Company's Premarket 510(k)
notifications, (vi) joint defense agreement between USMP and Smith Management
relative to the defense of lawsuit entitled 1212 HP, Ltd. 1826, Inc., et al. and
documents related to a claim made by Meridian Capital Group for fees in
connection with financial advisory services provided to the majority shareholder
of the Company in conjunction with efforts to arrange financing, (vii) various
articles, scientific papers, product brochures and documents describing among
other things the Company's products and technology, commercial applications
along with industry and competitor research covering certain segments of the
orthopedics market - hip, knee and small joint prostheses, trauma devices, and
bone anchors; OTC bulletin Board Daily stock price and volume detail; various
documents, memoranda prepared by the Company management, including but not
limited to (i) management discussion relative to its efforts to secure working
capital financing to meet operating shortfall along with weekly cash flow
projections for various periods in 1996 and 1997, (ii) management discussion
relative to its assessment of the alternatives to the Company to meet its
financial responsibilities to creditors, including reducing expenses, securing
working capital debt financing, sale or equity and or the sale of assets, as
alternatives to filing bankruptcy by the Company, (iii) management review of
the impact of the sale of assets on its employees, customers, suppliers and
creditors and (iv) management disclosure of the Company's intent to merge with
MMI following the closing of the Proposed Sale; information from the Company and
Hayes Medical regarding the projected future royalty payments made to the
Company by Hayes Medical; copies of press releases made during the period 1997
and 1996; copies of all employment agreements and list of officers and directors
with background information and organizational structure; schedule of contracts
in which the Company is obligated; the Company facilities description and
general post transaction relocation plan; business and marketing plan from Hayes
Medical including Hayes Medical current year assessment of distributor sales of
the Company's products; and the December 31, 1996 audited financial statement
for Hayes Medical.
In addition to the foregoing, the Advisor made inquiries of certain
officers of the Company who have senior responsibility for operating matters
regarding (i) the operations, financial condition, future prospects and
projected operations and performance of the Company, (ii) whether management is
aware of any events or conditions which might cause any of the assumptions set
forth in this Opinion to be incorrect, (iii) the nature of conversion of debt
equity of the Company and conversion of debt to capital by a third party note
holder during 1996, and (iv) management's continuing assessment of the
deteriorating financial condition of the Company during 1996 and since December
31, 1996, the date of the Company's most recent Draft Audited Consolidated
Statement of Financial Condition; certain financial forecasts and accompanying
assumptions prepared by the Company management for the years ending December 31,
1996 and 1997 were reviewed, and the assumptions underlying such forecasts were
discussed with officers of the Company; discussions were held with management of
the Company to review certain key aspects of the operating strategy for 1996 and
1997 following the acquisition of a majority position in the Company's equity by
MMI and the subsequent management re-structuring, and the circumstances
surrounding the Company's decision to pursue the sale of substantially all of
its assets and reorganize its business activities through a planned merger with
its majority shareholder. In addition, the Advisor analyzed the Company's
common stock trading prices and volumes for the period from January 2, 1996 to
December 31, 1996,
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<PAGE>
as well as January 1, 1997 to March 18, 1997 to ascertain stock price and volume
levels and volatility. The Advisor also performed generally recognized
financial analysis and valuation procedures to ascertain the financial condition
of the Company as well as to estimate its value based upon the appropriate
standard of value considering the circumstances. This analysis was presented to
the Board of Directors of the Company.
Pursuant to the terms of the Advisor's engagement, the Company agreed to
pay the Advisor a fee for rendering a fairness opinion in connection with the
Proposed Sale. The Advisor's aggregate fee for rendering the fairness
opinion in connection with the Proposed Sale will be approximately $40,000.
The Company has also agreed to reimburse the Advisor for its reasonable
out-of-pocket expenses. The Advisor had previously been retained by MMI to
provide certain valuation services relating to Metrax GmbH for which it will
receive a customary fee.
Approval Of The Board Of Directors; Reasons For The Proposed Sale
The Board of Directors believes that the Proposed Sale is expedient and
for the best interests of the Company. Accordingly, the Board of Directors
has approved the Proposed Sale. In reaching its determination, the Board of
Directors consulted with the Company's management as well as the Advisor, and
considered the following factors:
1. Current industry, economic and financial market conditions relating to
the Company and the Product Lines, as well as the financial condition, assets,
liabilities, businesses and operations of the Company and the Product Lines,
both on a historical and prospective basis. In evaluating the Proposed Sale,
the Board of Directors of the Company considered the prospects for the Company.
The Company was not profitable in 1995 and 1996, and there is no assurance that
the Company would be profitable in the future. The accumulated deficit in
Stockholders' Equity declined in the prior two fiscal years, from $(5,984,203)
at the end of 1994, to $(9,341,482) at the end of 1995, to $(15,225,259) on
December 31, 1996. The Board of Directors determined that the Proposed Sale
would substantially reduce the Company's debt and increase its Stockholders'
equity, and that future operations in segments of the industry in which the new,
current management have expertise might maximize a return for Stockholders. The
Company's management believes that the Proposed Sale will allow the Company to
discontinue a business that has not been sufficiently profitable to allow the
Company to pay all of its obligations as they become due without liquidating the
Company.
2. The results of the Company's efforts to identify other alternatives
with respect to the Product Lines, including the Board of Directors' judgment
that a disposition of the Product Lines on terms more favorable to the Company
and its stockholders would not likely be consummated.
3. The condition to the Asset Purchase Agreement that the Advisor provide
an opinion to be received by the Company that the Proposed Sale is fair to the
Company and its shareholders from a financial point of view to the Company. See
"--Opinion of The Advisor."
4. The proposed terms and structure of the Proposed Sale, including the
terms of the Asset Purchase Agreement, Hayes Medical's desire to acquire the
assets of the Product Lines and its unwillingness to acquire the Company as a
whole. See "The Asset Purchase Agreement--Indemnification."
5. The utilization of the net cash proceeds received from the Proposed
Sale to repay indebtedness, including indebtedness owed to an affiliate of MMI.
The Board of Directors believes that the Proposed Sale will thus allow the
Company to divest itself from unprofitable product lines, and will place the
Company in a stronger position to enter businesses in its area of expertise.
See "Use of Proceeds; Conduct of Business Following the Proposed Sale."
A material disadvantage of the Proposed Sale is that the Company will lose
several product lines with revenue potential. However, the Board of Directors
concluded after due consideration of the Proposed Sale and alternatives to it,
that this disadvantage is substantially outweighed by opportunities that the
disposition of assets and the capital received therefrom will provide. Although
revenue was generated by the assets, continuing losses
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<PAGE>
were substantial due to the capital-intensive nature of the business, and
management believes that the Proposed Sale will serve the Company and its
shareholders better in short and long term prospects.
In view of the wide variety of factors considered in connection with its
evaluation of the Proposed Sale, the Board of Directors did not find it
practicable to, and did not, quantify or otherwise attempt to assign relative
weights to the specific factors considered in reaching its determination.
Certain Tax Consequences
The Proposed Sale will be a taxable transaction to the Company for United
States Federal income tax purposes. The Company recorded at December 31, 1996 a
net deferred tax liability of $432,264 in anticipation of the estimated tax
liability resulting from the Proposed Sale.
Use Of Proceeds; Conduct Of Business Following The Proposed Sale
The net cash proceeds of the Proposed Sale received by the Company at the
Closing will be used to repay outstanding indebtedness of the Company and for
general working capital purposes. The Company has used $100,000 of the cash
payment of $400,000 under the License Agreements to repay indebtedness to MMI
(of which there remains outstanding approximately $138,750 as of May 31, 1997).
Following the Proposed Sale, the Company will finalize its merger negotiations
with MMI. Upon consummation of a merger between the Company and MMI, the
Company anticipates that it will remain as the surviving entity, change its name
to Metrax International, Inc. and continue the operations of MMI as a holding
Company for Metrax GmbH.
Interests Of Certain Persons In The Proposed Sale
The Company intends to use a portion of the net proceeds from the Proposed
Sale to repay outstanding indebtedness to MMI. For a description of the
intended application of proceeds from the Proposed Sale, see "--Background of
the Proposed Sale" and "--Use of Proceeds; Conduct of Business Following the
Proposed Sale."
Accounting Treatment
In accordance with GAAP, the results of the Company's business will be
included in the results of the Company through the Closing Date. Any gain or
loss on the disposition will be recognized as of the date the Proposed Sale is
closed. The Company recorded a writedown of inventory and fixed assets of
$3,325,000 for the year ended December 31, 1996, as a result of the realization
of impairment of inventory as of that date.
Dissenters' Appraisal Rights
Texas provides dissenters' rights for disposition of all or substantially
all of a Texas corporation's assets under Article 5.11A(2) of the Act.(5)
The procedure for dissent by shareholders is set out by Articles 5.12 of the Act
("Article 5.12"). USMP must, "within ten (10) days after the date the
[Disposition] is effected, mail to each shareholder of record as of the
effective date of the [Disposition], notice of the fact and date of the
[Disposition] and that the shareholder may exercise the shareholder's right to
dissent from the [Disposition].(6) The shareholder may then make written
demand, within twenty (20) days after the mailing of the notice, for payment of
the fair value of the shareholder's shares. Failure to make demand within the
twenty day period will result in the shareholder being bound by the sale.
- --------------------------------
(5)/ Tex. Bus. Corp. Act art 5.11A(2)
(6)/ Tex. Bus. Corp. Act art 5.12A(1)(b)
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The Company must accept, or reject by making a counteroffer as to the
estimated fair value of the shares, the dissenting shareholder's demand for
payment. Should the dissenting shareholder reject the counteroffer, then within
120 days after the date on which the disposition was effective, the shareholder
or the Company may "file a petition in any court of competent jurisdiction in
the county in which the principal office of the domestic corporation is located,
asking for a finding and determination of the fair value of the shareholder's
share."(7)
If the dissenting shareholder accepts payment by the Company for such
shareholder's shares, the shareholder shall cease to have any interest in the
shares of the Company.(8) Payment of the fair value of the shares is the sole
remedy for dissenting shareholder, unless there is fraud in the transaction.(9)
If the Company complies with the requirements set out in Article 5.12, then
failure of the shareholder to comply with the procedure as set out by Article
5.12 will result in such shareholder not being entitled "to bring suit for the
recovery of the value of his shares or money damages to the shareholder with
respect to the [sale].(10)
THE LICENSE AGREEMENT
Although the Company believes that the following summary describes the
material terms and conditions of the License Agreement, such summary is
qualified in its entirety by reference to the full text of the License
Agreement, a copy of which is attached as Annex B to this Information Statement
and is incorporated herein by reference. Terms which are not otherwise defined
in this summary have the meaning set forth in the License Agreement.
The License Agreement provides for the sale to Hayes Medical of the
Company's Intellectual Property related to the Product Lines. The License
Agreement provides Hayes Medical with an exclusive, royalty-free, worldwide,
irrevocable license, including the right to grant and authorize sublicenses, to
manufacture and otherwise distribute the Products Lines and apparatus useful for
manufacturing the Product Lines. Pursuant to the License Agreement the Company
retained a non-exclusive, non-assignable, royalty-free, worldwide irrevocable
license, without the right to grant or authorize sublicense under the
Intellectual Property; provided, however, on the earlier to occur of (i) the
closing of the Asset Purchase Agreement or (ii) July 15, 1997, the Company shall
take all actions necessary to transfer and assign all right title and interest
in the Intellectual Property to Hayes Medical and any license or other right
shall terminate immediately thereon. Notwithstanding the above, if there has
been no closing by July 15, 1997, the Company shall have the right to sell any
and all Inventory existing on July 15, 1997. The consideration paid by Hayes
Medical under the License Agreement was $400,000 and a promissory note, secured
by the inventory of Hayes Medical, in the amount of $150,000 at 10% interest per
annum payable over eighteen months.
The License Agreement also provides that until the earlier of the closing
of the Asset Purchase Agreement or until all of the existing Inventory of the
Company is sold, the Company shall continue to maintain product liability
insurance with a limit of not less than $1,000,000 per occurrence to cover
claims relating to Products manufactured and sold by the Company to any third
party, including distributors. For a period of five years following the earlier
of the closing of the Asset Purchase Agreement or until all of the existing
Inventory of the Company is sold, the Company shall maintain product liability
insurance with a limit of not less than $1,000,000 per occurrence to cover
claims relating to Products manufactured and sold by the Company to any third
party, including distributors.
- ----------------------------------------
(7)/Tex. Bus. Corp. Act art 5.12B
(8)/ Tex. Bus. Corp. Act art. 5.12A(1)1(b)
(9)/Tex. Bus. Corp. Act art. 5.12G
(10)/ld.
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<PAGE>
THE ASSET PURCHASE AGREEMENT
Although the Company believes that the following summary describes the
material terms and conditions of the Asset Purchase Agreement, such summary is
qualified in its entirety by reference to the full text of the Asset Purchase
Agreement, a copy of which is attached as Annex ___ to this Information
Statement and is incorporated herein by reference. Terms which are not
otherwise defined in this summary have the meaning set forth in the Asset
Purchase Agreement.
Assets to be Sold and Liabilities to be Assumed
The Asset Purchase Agreement provides for the sale by the Company to Hayes
Medical of certain tangible and intangible assets relating to the Products and
for Hayes Medical to assume certain liabilities relating to the same. The
assets to be sold or transferred by the Company to Hayes Medical pursuant to the
Asset Purchase Agreement (the "Assets") constitute substantially all of the
assets of the Company and include: (a) all trade and other notes and accounts
receivable of the Company as selected by Hayes Medical arising out of the
operations related to the Products; (b) all current and usable inventories of
Products on hand or under consignment for use by the Company's customers (the
"Inventory"); (c) all rights and benefits of the Company under contracts and
agreements with any third parties made by the Company, as selected by Hayes
Medical, including leases of real or personal property and agreements to provide
services and any purchase options provided therein to acquire the property so
leased (the "Acquired Contracts"); (d) all lease and rent deposits, prepaid
expenses, and prepaid taxes related to the Company's operation of the Company;
(e) all permits, consents and certificates of any regulatory, administrative or
other governmental agency or body that are used in, or are required or necessary
for, the ownership, operation or maintenance of the Company; (f) all other
tangible assets of the Company, excluding leasehold improvements directly
related to the operation or maintenance of the Company, including by way of
example, furniture, business fixtures, office supplies and expendables; and (g)
all intangible assets used in the Company's operation or maintenance of the
Company, including, goodwill, the books and records of the Company in operating
the Business, the Company's trade names used in the operation of the Company
business and any confidential or proprietary information of the Company
developed or used in connection with its operation of the Company. Pursuant
to the Asset Purchase Agreement, Hayes Medical will assume and thereafter be
responsible for paying and satisfying the following liabilities (the "Assumed
Liabilities"): (a) the Company's liabilities arising on or after the Closing
Date with respect to the Acquired Contracts including permitted returns and
allowances in the ordinary course of business, which amounts due as of the
Closing Date are set forth in the final Closing Statement; (b) all open purchase
orders related to Products or related instruments; or other open purchase orders
related to the ongoing Business, not to exceed $10,000.00 in the aggregate,
unless otherwise approved by Hayes Medical; (c) all liabilities set forth on the
Final Closing Statement (as hereinafter defined), but in no event is Hayes
Medical liable for any amounts coming due prior to or after the Closing Date
beyond what is specifically set forth in the Final Closing Statement; (d) all
taxes and assessment (including any liabilities with respect to penalties or
interest thereon) imposed by any governmental authority accruing after the
Closing Date to the extent related to the ownership or use of Assets or the
conduct by Hayes Medical of the Business after the Closing Date; and (e)
liabilities with respect to any alleged or actual injury to person or damage to
property allegedly or actually resulting from Products if the Product which
gives rise to a claim of alleged or actual injury or damage is manufactured and
sold on or after the Closing Date.
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The Asset Purchase Agreement requires that the Company, from the Closing
Date until the fifth anniversary of the Closing Date, maintain product liability
insurance with a limit of not less than $1,000,000 per occurrence to cover
claims relating to Products manufactured and sold by the Company to any third
party, including distributors, prior to the Closing Date.
Purchase Price
The Asset Purchase Agreement provides for an aggregate consideration, to be
delivered to the Company at the Closing, equal to: (i) $300,000 in cash
(subject to adjustment); (ii) a secured promissory note (the "Note"), which
shall be in the principal amount of 56.25% of the agreed upon historical cost of
the Assets (determined according to GAAP) less the Assumed Liabilities at the
Closing, less the $300,000 cash payment and less any reduction pursuant to Hayes
Medical's right of offset. The Note will be due in eighteen equal monthly
installments including accrued interest with the first such monthly installment
being due the first day of the first month beginning after the Closing Date and
subsequent installments being due the first day of each month thereafter. The
Note will bear interest at ten percent (10%) per annum and will be secured by
the inventory of Hayes Medical.
The final purchase price will be determined based on the Final Closing
Statement, which the Company shall deliver to Hayes Medical within 30 days after
the Closing Date. The Company delivered to Hayes Medical a draft closing
Statement, attached as Annex A to this Information Statement and is incorporated
herein by reference.
The Closing will take place on that date and time as the Company and Hayes
Medical mutually agree that all conditions precedent to the obligations of the
parties under the Asset Purchase Agreement have been met. See "--Conditions."
Representations and Warranties and Certain Covenants
The Asset Purchase Agreement contains various customary representations and
warranties of the Company and Hayes Medical. These include representations and
warranties by the Company as to its: (a) corporate organization; (b) authority;
(c) absence of violation of law; (d) contracts and commitments; (e) receivables;
(f) financial statements; (g) events subsequent to balance sheet date; (h)
assets; (i) title to property; (j) litigation; (k) taxes; (l) compliance with
law; (m) labor relations; (n) environmental matters; (o) undisclosed material
liabilities; (p) brokers, finders; (q) personnel; (r) insurance; (s) accuracy of
documents and information; (t) interests in real property; (u) property taxes;
(v) product warranties; (w) relations with customers, suppliers and vendors; (x)
change of name; (y) non-competition; (z) SEC filings; and (aa) schedules. Hayes
Medical's representations and warranties include those as to (a) corporate
organization; (b) authority, (c) absence of violation of law; and (d) brokers
and finders.
Pursuant to the Asset Purchase Agreement, each of the parties has agreed,
among other things, to use its commercially reasonable efforts to facilitate
the consummation of the Proposed Sale. Each party has agreed to make all
filings, applications, statements and reports to all governmental authorities
which are required to be made prior to the Closing Date by such party
pursuant to applicable law in connection with the Proposed Sale.
For a period of time extending from the Closing Date until the second
anniversary following the Closing Date, the Company will not, and the Company
will cause each of its employees, officers, directors (for so long as they serve
in such capacities) and persons having a controlling interest in the Company not
to, directly or indirectly compete with Hayes Medical or its subsidiaries in the
development, manufacturing, distribution, marketing or sale of any orthopaedic
hip or knee implants or related instruments or devices.
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<PAGE>
Employment and Employee Benefit Plans
The Asset Purchase Agreement provides that the Hayes Medical will offer
employment to certain of the Company's employees as Hayes Medical, in its sole
discretion, elects to employ, effective as of the close of business on the
Closing Date, with a level of compensation and benefits and on other terms and
conditions of employment substantially similar to each such employee's existing
arrangements with the Company. Effective at the close of business on the
Closing Date, all employees of the Company who accept Hayes Medical's offer of
employment (collectively, the "Transferring Employees") shall cease to be
covered by the Company's employee welfare benefit plans, including plans,
programs, policies and arrangements which provide medical and dental coverage,
life and accident insurance and disability coverage (collectively, "Welfare
Plans"). The Company shall retain responsibility for all Welfare Plans claims
incurred by all employees of the Company (and their dependents) on or prior to
the Closing Date. Hayes Medical shall assume responsibility for all claims
under Hayes Medical's employee welfare benefit plans incurred by Transferring
Employees after the Closing Date.
Conditions
The obligations of Hayes Medical to consummate the Proposed Sale are
subject to the following conditions: (a) the Company shall have obtained and
delivered to Hayes Medical all consents which are necessary in order to
consummate the Proposed Sale, including the consent of the other parties to the
Acquired Contracts as to the assignment of such contracts; (b) all obligations
under the Asset Purchase Agreement which are to be performed or complied with by
the Company shall have been fully performed and complied with in all material
respects at or prior to the Closing Date; (c) there shall be no material pending
or threatened claim or action claiming that the Asset Purchase Agreement is
illegal; (d) there shall have been no material adverse change in the properties,
business or financial condition of, the Assets, or Products of the Company since
the Draft Closing Statement, provided that changes in the value of the Assets
arising in the ordinary course of business or due to the sale of Inventory to
Hayes Medical prior to the Closing shall not be deemed a material adverse
change; and in the Updated Draft Closing Statement, the Assets shall exceed the
Assumed Liabilities by at least $300,000.00; (e) all representations and
warranties (including any Schedules contained therein) shall be true as of the
Closing Date; (f) the Company's Board shall have obtained the Advisor's fairness
opinion; (g) the Company shall have obtained the approval of the Board of
Directors of the Company and approval of the shareholders of the Company for
the execution and delivery of this Agreement and the transactions contemplated
hereby; (h) the Company shall have delivered to Hayes Medical a certificate
executed by its President or Chief Executive Officer, dated the date of the
Closing, to the effect that certain of the conditions set forth above have been
satisfied; (i) the form and substance of all certificates, instruments, opinions
and other documents delivered or to be delivered to Hayes Medical under this
Agreement shall be satisfactory to Hayes Medical and Hayes Medical's counsel in
all reasonable respects; (j) the parties shall have complied with all applicable
bulk sales and similar laws with respect to the transfer of the Business; (k)
Hayes Medical shall have received each of the Bill of Sale, Assumption of
Liabilities, the Assignment of Lease and all other documents deemed necessary
by Hayes Medical in connection with Closing duly executed by authorized
signatories of each party thereto; (l) Hayes Medical shall have provided the
Company with a survey of the real property subject to the Facility Lease
together with the improvements thereon, such survey to be reasonably
satisfactory to Hayes Medical and to be conducted at Hayes Medical's cost; (m)
the Company shall have provided Hayes Medical with a release of all claims
asserted against the Company and its parent, by a certain investment banking
firm in connection with a dispute over advisory fees between MMI and the firm;
(n) and all covenants, conditions and other obligations under the Worldwide
Exclusive Distributor Agreement and the License Agreement which are to be
performed or complied with by the Company shall have been fully performed and
complied with in all material respects at or prior to the Closing Date,
including the delivery of all assignments of the Intellectual Property under the
License Agreement.
Termination
The Asset Purchase Agreement may be terminated and abandoned at any time
prior to the Closing Date by the written agreement of the Company and Hayes
Medical.
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Indemnification
The Asset Purchase Agreement provides that the Company shall indemnify
Hayes Medical after the Closing against and in respect of any of the following
(collectively, "Hayes Medical Losses") and Hayes Medical's right to
indemnification from the Company shall include, but is not limited to, Hayes
Medical's right to offset the Note payments (pursuant to the terms of Asset
Purchase Agreement) for any of the Hayes Medical Losses: (i) any and all claims,
losses, costs, expenses, commitments, agreements, liabilities and obligations of
the Company, or arising from the operations, or employees of the Company either
before or after the Closing Date (including, without limitation, the operation
of the Company prior to the Closing Date), whether accrued, absolute, contingent
or otherwise and whether or not disclosed in the Asset Purchase Agreement or the
Schedules, to the extent not expressly assumed by Hayes Medical pursuant to the
Asset Purchase Agreement; (ii) any and all damages resulting to Hayes Medical
from any misrepresentation, breach of warranty or covenant made by the Company,
or nonfulfillment, in whole or in part, of any obligation on the part of the
Company under the Asset Purchase Agreement, the License Agreement or any
Schedule or document delivered pursuant hereto; (iii) any and all damages and
costs associated with Product recalls, notifications, or other actions for
Products manufactured and sold to third parties, including distributors, prior
to the Closing; (iv) any and all taxes of the Company, or applicable to
operation of the Business prior to the Closing Date to the extent not provided
for on the Final Closing Statement; and (v) all costs, assessments, judgments
(including reasonable costs and attorneys' fees and other expenses) arising out
of any claim, or the defense or investigation thereof, made with respect to any
of the matters described above.
Hayes Medical has agreed to indemnify the Company after the Closing
against and in respect of any of the following (collectively, "the Company
Losses"): (i) any and all claims, losses, costs, expenses, commitments,
agreements, liabilities and obligations of the Company to the extent
expressly included within the Assumed Liabilities; (ii) any and all damages
resulting to the Company from any misrepresentation, breach of warranty or
covenant made by the Company, or nonfulfillment, in whole or in part, of any
obligation on the part of Hayes Medical under the Asset Purchase Agreement or
any Schedule; (iii) any and all claims, losses, costs, expenses, commitments,
agreements, liabilities and obligations of Hayes Medical arising from events
occurring in the operation of the Business after the Closing Date; and (iv)
all costs, assessments, judgments (including reasonable costs and attorneys'
fees and other expenses arising out of any claim, or the defense or
investigation thereof, made with respect to any of the matters described
above.
CERTAIN INFORMATION CONCERNING HAYES MEDICAL
Hayes Medical was incorporated in 1992 to capitalize on emerging business
opportunities in the medical device industry. Hayes Medical's mission is to
become an industry leader in the creation, evolution, and production of world
class medical products and technologies for the orthopedic implant and device
market. It will sell its products to the medical profession throughout the
United States and other countries. Hayes Medical is in the development stage
and has yet to generate any significant product revenue, but has recently begun
to sell its products to outside customers.
Research and development activities have been undertaken since Hayes
Medical's inception. This effort includes development of proprietary software
which is used for designing Hayes Medical's products and the development of
additional orthopedic products. Hayes Medical will continue research and
development of its product line.
Hayes Medical has engaged in consulting services to help fund its research
and development activities. This consulting is provided in five key areas:
product development, regulatory affairs, research, technical writing, and
education. Thirty-eight percent of revenues have resulted from these consulting
services.
During 1995, Hayes Medical purchased substantially all of the assets of
National Medical Specialty, Inc. (NMSI), a company engaged in the distribution
of medical specialty products. Sixty-one percent of Hayes Medical revenues have
resulted from distribution sales.
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PRO FORMA FINANCIAL INFORMATION
The following tables set forth pro forma condensed financial information of
the Company for the quarter ended March 31, 1997. The unaudited pro forma
condensed balance sheet gives pro forma effect to the Proposed Sale as if such
transactions had been consummated on March 31, 1997. The unaudited pro forma
condensed financial information has been prepared on the basis that the Company
would have received cash consideration of $300,000 (as of March 31, 1997) from
the Proposed Sale and does not give effect to any Purchase Price decrease
resulting from the Company's results of operations for the period from March 31,
1997, to the Closing Date or any other Purchase Price adjustment. See "The
Asset Purchase Agreement--Purchase Price" and "The Proposed Sale--Background of
the Proposed Sale."
The unaudited pro forma adjustments are based upon available information
and certain assumptions that the Company believes are reasonable. The pro forma
condensed financial information does not necessarily reflect the financial
position or the results of operations of the Company that actually would have
resulted had the transactions described above been consummated as of the date or
for the period indicated, or to project the Company's financial position or
results of operations at any future date or for any future period. The pro
forma condensed financial information should be read in conjunction with the
Company's Financial Statements for the year ended December 31, 1996 and the
Notes thereto incorporated by reference in this Information Statement.
UNAUDITED CONDENSED PRO FORMA BALANCE SHEET
(All Amounts in 000's)
March 31, Pro-forma March 31,
1997 Adjustments 1997
Historical (A) As Adjusted
---------- ----------- ------------
Assets
Cash $56 $700 $756
Note recievable 0 2,128 2,128
All other assets 3 ,517 (689) 0
---------- ----------- ------------
Total Assets $3,573 ($689) $2,884
---------- ----------- ------------
---------- ----------- ------------
Liabilities and stockholders' equity
Liabilities $3,428 (689) $2,739
Stockholders' Equity (B) 145 145
---------- ----------- ------------
Total liabilities and stockholders'
equity $3,573 ($689) $2,884
---------- ----------- ------------
---------- ----------- ------------
(A) To reflect the transaction with Hayes Medical whereby the Company will sell
(a) all of its intellectual property for cash of $400,000 and a promissory
note for $150,000; and (b) substantially all of its assets for cash of
$300,000 and a promissory note for 56.25% of the agreed upon historical
cost of the assets, less certain liabilities to be assumed by Hayes
Medical, and less the cash payment.
(B) No adjustment to stockholders' equity is necessary, and no income statement
is presented herein, because the Company's March 31, 1997 historical
financial statements reflect a writedown of its assets to reflect an
impairment. Therefore, it is anticipated that the Hayes Medical
transaction will have no income statement effect on the Company.
RECENT DEVELOPMENTS
On June 16, 1997, the Boston Stock Exchange notified the Company that it
had suspended trading of the Company's common stock and warrants, and intended
to file for immediate delisting of the Company's securities with the Securities
and Exchange Commission. The Exchange's decision was based upon the Company's
inability to comply with the minimum maintenance requirements relating to market
value of public float and shareholder's equity.
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<PAGE>
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth as of March 31, 1997, the total number of
shares of Common Stock beneficially owned, and the percent so owned, by each
Director of the Company, by each person known to the Company to be the
beneficial owner of more than 5% of the outstanding Common Stock, by the
Company's Chief Executive Officer and by all Directors and executive officers
(including two former executive officers) as a group. The number of shares
owned are those "beneficially owned," as determined under the rules of the
Commission, and such information is not necessarily indicative of beneficial
ownership for any other purpose. Under such rules, beneficial ownership
includes any shares as to which a person has sole or shared voting power or
investment power and any shares of Common Stock which the person has the right
to acquire within 60 days through the exercise of any option, warrant or right,
through conversion of any security, or pursuant to the automatic termination of
power of attorney or revocation of trust, discretionary account or similar
arrangement.
As of December 31, 1996
Shares of Common Stock Percent of Outstanding
Common Stock
Metrax Medical, Inc. 12,998,060 (1) 80%
P.O. Box 41667
Nashville, Tennessee 37204
Heinz Bucher 12,998,060 (1) (2) 80%
Frederick Mindermann 12,998,060 (1) (2) 80%
Thomas Otto 12,998,060 (1) (2) 80%
Directors and executive officers 12,998,060 (2) 80%
- -------------------------------------------------------------------------------
(1) Does not include 17,270,948 Class A Warrants to acquire, in the aggregate,
17,270,948 shares of Common Stock.
(2) Messrs. Bucher, Mindermann, and Otto are executive officers of Metrax
Medical. Consequently, for each of these individuals, the table includes
the 12,998,060 shares of Common Stock held by Metrax Medical, although each
of these individuals disclaims individual ownership of such shares.
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<PAGE>
MARKET PRICE DATA
The following table sets forth high and low trade prices of the shares of Common
Stock of the Company for each quarterly fiscal period of 1996 and 1995, based on
information received from the Boston Stock Exchange.
HIGH LOW
-------- -------
1997
First Quarter 15/64 1/4
1996
First Quarter 5/8 7/32
Second Quarter 1/2 1/2
Third Quarter 5/16 5/16
Fourth Quarter 1/4 1/4
1995
First Quarter n/a (1) n/a (1)
Second Quarter 19/32 1/2
Third Quarter 5/8 7/16
Fourth Quarter 3/16 3/16
(1) There was no active trading during the first quarter of 1995.
The Company's Common Stock and warrants were suspended from trading on the
Boston Stock Exchange on June 16, 1997, for failure to comply with the
Exchange's minimum maintenance requirements relating to market value of public
float and shareholder's equity.
17
